Cable tries to keep command of crucial pipeline

Industry faces growing competition to feed content to digital homes

By

DavidB. Wilkerson

CHICAGO (MarketWatch) -- Cable companies know that whatever the digital home of the future will look like, the Internet will be the main conduit to its possibilities.

When delivery of high-definition movies and TV shows straight from the Web to the TV becomes more commonplace, when having every computer and TV synchronized with what you want when you want it becomes a standard expectation, and when your house's various lighting and cooling systems have separate IP addresses, control of the broadband pipe will be paramount.

That means, before long, the biggest providers of broadband service will be the most envied distributors in media, with cable and phone companies best positioned to claim those roles.

Cable has a huge head start, with its services available in most U.S. homes after a decades-long build-up. But now the phone companies can offer video and voice services that can match cable, with high-speed Internet connections that are faster than cable modem, in some cases. While some expect cable to prevail, the phone companies are certain to whittle away cable's market share advantage in the years to come.

Defining a wireless strategy

For several years, cable operators have successfully marketed a "triple play" package, which bundles video, broadband and voice services. Some say what the industry now needs to compete with telephone companies, which have broadened their own offerings, is a "quadruple play" package that includes wireless service, especially wireless broadband.

"This is where the battle will be won or lost," says analyst Tuna Amobi of Standard & Poor's Equity.

Cable industry veterans are less certain.

"I think the question isn't so much about having a new service, as it is whether or not one or all of those triple-play elements are portable and mobile," said Kyle McSlarrow, chief executive of the National Cable & Telecommunications Association. "Cable companies have indicated interest in connecting the broadband experience to out-of-home devices [as well as in the home]. How it all plays out, I just don't know."

For now, fixed-wire services still retain a big advantage in speed over even the fastest wireless connections, noted Dallas Clement, senior vice president of strategy and development for Cox Communications.

"That doesn't mean that people don't want convenience and mobility and portability ... But I don't think people will disconnect their wire in favor of a wireless product," Clement said. "So I don't worry about it today as a defensive issue."

Glenn Britt, chief executive of Time Warner Cable
TWC, +0.00%
agrees. "Our view and my view is that the existing technologies represent something for us to do if consumers really demand the quadruple play," he told analysts during the company's second-quarter earnings call last week. "And ... we have seen little evidence of the demand for that so far."

Britt added that the wireless voice market is "maturing," implying that there may be less opportunity for cable in the wireless arena as time goes on.

Competition builds

When it comes to broadband speed, cable has faster rivals in Verizon's
VZ, +0.02%
FiOS platform and AT&T's
T, +1.16%
Uverse. FiOS and Uverse boast top speeds of 50 megabits per second. At that rate, a nearly two-hour high-definition movie only takes about 13 minutes to download. An hour-long TV show only takes 8 seconds. FiOS also lets you upload data at 20 megs a second. Uploading about 400 digital photos to the Web takes a FiOS user about four minutes.

Though Comcast
CMCSA, -1.11%CMCSK
is conducting a trial of a broadband tier with an upload speed of 5 megabytes per second, the price tag is a hefty one at $150 a month.

FiOS' offering, with an upload speed of 20 megs a second, comes in at $89.95 a month in New York and Virginia and at $139.95 elsewhere with an annual service plan.

The upload speed may be an overlooked aspect of the offering, says John Schommer, a director of broadband national marketing for Verizon.

"You see a lot of social networking activity that's facilitated by these kinds of speeds," Schommer said. "A lot of people see that when they have their digital photos, they want to have them on Facebook, MySpace and everything else. So I think you're going to see a lot more of that, and upstream speed will be a much more important factor in their day-to-day lives."

Cable executives aren't ignoring the FiOS speed advantage, but with broadband sign-up rates increasing -- mostly due to former DSL customers who are looking for faster service -- they believe they can respond in a deliberate way, making sure potential bugs are ironed out before deploying new technology to all of their systems.

"We have an enhancement to our network called DOCSIS 3.0 that doesn't even flip the dollar needle that people have historically associated with cable upgrades," said Cox's Clement.

Developed by CableLabs, DOCSIS, or Data Over Cable Service Interface Specification, is an international standard for cable modems that allows a fast connection for broadband, digital voice and videoconferencing. DOCSIS 3.0, which debuted two years ago, allows for connection speeds that can keep up with FiOS' fiber network.

"And we can and will have it available over 100% of our footprint, whereas I don't think Verizon has ever said it would offer FiOS to 100% of its footprint," Clement said. Cox, which has been privately held since 2004, competes with FiOS and Uverse in several markets.

Schommer says FiOS intends to reach 18 million homes by 2010. "We have looked beyond that, economically, to see what the next steps are, and it's not a bad economic model ... But the greater the density, the greater the payback."

For this reason, FiOS has concentrated for now on densely populated urban areas, recently expanding its service footprint to 16 states, including parts of California, Delaware, Indiana, Maryland, Oregon, Pennsylvania, South Carolina, Texas, Virginia and Washington.

Verizon is realizing, however, that in smaller areas like Ft. Wayne, Ind., subscriber sign-ups have been greater than anticipated. Schommer says these results have encouraged the company to continue to "look at the mathematics" and see if a wider expansion might be viable.

Meanwhile, Comcast intends to offer 50-meg speeds to 20% of its subscribers by the end of this year, and to its nationwide customer base by mid-2010.

DOCSIS has the potential to allow speeds of 160 megs per second, which would let users download hi-def movies in less than five minutes. Of course, the telephone providers will work to make sure they're not surpassed by any surge in speed that cable comes up with.

Ensuring quality

As we go about our increasingly broadband-dependent lives, speed won't be the only major consideration. Equally important will be the quality of our Internet experience.

Any broadband user knows the frustration of encountering buffering problems in the middle of an online video or having your connection simply conk out for a few moments just as you want to move to another site.

With higher speeds possible and so many people using a given network at once, things could get out of hand pretty quickly.

"As soon as you open up a freeway, there'll be too many cars within a short period of time," said Gary Schultz, founder and president of Multimedia Research Group, a Sunnyvale, Calif., firm that analyzes new media technologies. "The fact that it'll be there will just invite people to use it as much as possible. And if it's not regulated by the carrier, eventually there will be loss of business and chaos. There has to be some kind of quality assurance."

But both cable companies and phone providers have to be careful as they try to control the use of their networks, as Comcast discovered Aug. 1 when the Federal Communications Commission ordered it to stop interfering with the activity of customers who use peer-to-peer networks to download online video.

Comcast says people who download movies from sites such as BitTorrent are using more than their fair share of the available bandwidth, causing a decline in service quality for other users. The FCC, however, ruled that "the end result of Comcast's conduct was the blocking of Internet traffic, which had the effect of substantially impeding consumers' ability to access the content and to use the applications of their choice."

In a discussion with MarketWatch in May, Cox's Clement expressed concern that regulators don't get it.

"If there are customers who are abusing the experience to the detriment of other customers, it's our job to look out for the little guy, who's just trying to go to some Internet sites, download some emails, and some pictures, or whatever," Clement said.

Schultz agrees. "The cable operator can't call network management throttling, or blocking," he said. "Those are forbidden words. However, offering tiered services is reasonable, including tiers based on speed."

The great unknown

Finally, cable has to position itself to be ready for new applications that no one has even thought of yet. The industry believes it has done that with a standard called tru2way, also developed by CableLabs.

The standard allows a new generation of TVs to include video on demand, digital video recording, interactive programming guides and other services -- without a set-top box.

The NCTA's McSlarrow says tru2way gives cable a big opportunity. "It uses Java middleware, which allows anybody to write an application to that standard, and invest in it, knowing that they now have a national footprint that they can market to, in much the same way developers do with Windows or any other operating system. That's been missing, because until now, every cable system, even using the same kind of technology, has been different."

Cable's ability to stay in command of the broadband pipeline to U.S. households lies in its ability to cooperate effectively, keep improving Internet download speeds, come up with simple interfaces that subscribers do complicated things with the touch of one or two buttons, and to keep itself open to revolutionary ideas. This final task is easier said than done, in a climate that has become more unforgiving of major cable investments.

That's why the industry's mantra, for now, is to explore new technologies in trials, but to hold off on making those technologies universal until there's good quality control, and strong demand has manifested itself.

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